The eNova Partnership: A pan–European multi channel advisory group

For this summer’s edition we spend a disproportionate amount of time on pure play internet retailers, as the Ocado saga and the news that ASOS was considering teaming up with other retailers for pick up points gave us a lot of food for thought; hoping it will fuel fresh ideas for the busy back to school season!
 
Please share your feedback and comments with us atsophie@enovapartnership.com or andy@enovapartnership.com.  In the meantime all of us at eNova wish you a good and successful Autumn.

Contents

From Screen-to-Door to Screen-to-Store
Lessons learnt from Ocado
Multichannel quarterly market summary
Stat of the quarter

From Screen-to-Door to Screen-to-Store

When a day after our previous newsletter the FT reported that ASOS was seeking partnerships with high street retailers as pick-up points, we couldn't wait writing about it in our next newsletter and the news put a big smile on our face. Not only as customers, but also as multichannel advocates.

The fact that home delivery can be a barrier to some consumers is no news and solutions such as physical drop boxes or collection store networks have been talked about for years. But no one has taken the click to brick plunge yet in any meaningful way. This might be the catalyst.

Pure online retail, in spite of all the hype surrounding it, possesses one fundamental barrier to growth; the fact that, as those of you who've been waiting around for hours for a parcel or had to rush to the post office before 5pm to get it know, home delivery is not convenient for many people working or leading busy lives. What still amazes us is the number of high street retailers who have an e-commerce arm that acts as a pure play, thus falling in to the same trap. Not that we believe you can’t have a successful on-line pure play, as ASOS has demonstrated.

Let's remember online retail only represent 7% of total UK retail sales and its growth is slowing down to mid teens and soon single digit numbers. We believe that the growth is in multichannel, where the purchase goes through the website but doesn't end there, which we and other market observers estimate will grow at over 20% p.a. over the next 5 years to represent 40% of total retail sales in the UK by 2013.

Fashion retail has ignored this for too long.  Will the one that led the fashion innovation on-line, stir the debate once again?  We hope that this will act as a call to action to other fashion retailers who have been shying away from click and collect models for too long. If ASOS feels the need for stores, those who already have them and are not linking them to their websites should reflect upon the missed opportunity that this might represent. Here's a crack at the answer for you: in our experience, properly executed click & collect should double your website takings within a year as a starting point.  

Having created several of the leading order on-line, collect in store services, including Argos, Halfords and Boots, we suspect there are still a number of bumps that will need to be ironed out when trying to mould a home delivery set up with a store pick up as to not reduce margin.  To this end, store based fashion retailers may still have an advantage if they get to grips with the opportunity sooner rather than later. Most importantly, let’s remember customers are the ones driving these developments, which will be the fastest growing part of retail for the next 5 years.

Lessons learnt from Ocado

Never in recent history had a retail IPO divided opinions so much, and generated such strong pre-IPO comments - “Ocadon’t”, claimed one of the research reports covering the offering.  We will not add to the already heated debate around Ocado’s viability or valuation but rather to consider lessons learnt from a rare event: the listing of a pure play internet retailer. After all, the UK stock exchange only has two examples of these beasts: ASOS, and now Ocado.

Ocado’s profitability is at the centre of the debate around the business’ future, and so it should be, for a company that has yet to make a profit. The interesting fact though is the fundamental reasons for Ocado’s low profitability are not specific to the business, but generic to pure play internet models like ASOS and Ocado: the need to generate awareness and traffic without a store presence (higher marketing costs), the dispatch to individual homes and customers’ resistance to pay for it (higher delivery costs), and higher requirements of customer care to replace physical contacts (returns, call centres). These additional costs are rarely offset by the savings that pure plays can make over their high street counterparts on rent and to a lesser extent staff.
In the case of Ocado, add high technology costs and depreciation, and a low gross margin industry to start with, and the result is negative profitability.

Taking a closer look at ASOS as the only other publicly available datapoint, delivery costs are estimated by analysts to be double digit as a percentage of sales, more than double their traditional high street peers; whilst marketing and “customer care” costs (returns, call centre) probably account for another 8 points of margin. When the bottom line is an 11% EBITDA margin, that’s perfectly acceptable. But that’s from the one-and-only, greatly managed and innovative ASOS, which has been growing at triple digit growth rates until recently. Why isn’t it commanding the high margins of its best in class high street fashion competitors? The fashion world’s top quartile should command 15% + EBITDA margins. Whilst they might get there eventually, things might take longer than one would think. One of the other fundamental attractions of retail business models, that has long attracted private equity’s appetite to the sector, is again more difficult in the pure play world: operational leverage. Pure plays’ cost structures are on the main variable, making incremental growth that much more expensive.

Taking a quick look around, the profitability picture is less than rosy for other pure players. Of the top 20 online retailers in the UK, the majority (12, and 64% of sales), are from retailers with stores (Tesco leading the way). Profitability-wise, we estimate only 3 of the 8 pure plays have profitable retail operations, one of which ASOS, another one Amazon, for whom the journey to profitability took 8 years and to return on investment at least a couple more.

So whilst making money online as a pure play is perfectly achievable, it by nature a long and challenging journey where only few succeed. Retailers with stores have an immense competitive advantage in the form of their stores and staff that can be leveraged to create traffic, brand awareness, and customer service to an online proposition. Whilst many understand the value that link from the customers’ point of view, few have evaluated quite how much financial value a multichannel proposition can bring to the bottom line. If they had, true multichannel penetration would be much higher than it currently is! Consider this as a starting point:  a customer can’t find a product in store and is directed by staff to the website. She goes back home, reserves it online, and picks it up two days later on her way home. Incremental costs to the retailer: rent zero, staff 2 minutes, distribution zero, marketing zero. Profitability of the sale: direct contribution margin. Having saved a sale and made a customer happy: Priceless.

So here’s our message to retailers with stores worried about online competition: if you got’em, use’em! 

Multichannel quarterly market summary

Online sales growth continued at a strong pace this quarter, consistently between +15% and 20% y-o-y, in a good trajectory to outpace the industry’s forecasts for the year. Growth was fuelled by the World Cup, Wimbledon and the warm weather, with electronics unsurprisingly one of the fastest growth categories, and clothing and accessories continuing their record ascension.
43% of UK consumers are now buying online once a week and spending on average £71 a year, according to a recent survey by eCommera.

Across the Channel, ecommerce continued to grow unabated at over 30%, to a contribution of 3.7% of retail sales, once again confiming the relative immaturity of Europe’s other ecommerce markets compared to the UK.

Interestingly though, France saw some shimmering of multichannel activity with retailer Intersport announcing plans to try out an order and collect service with sale attribution to store, and integrate online and in-store fulfilment and logistics. Timid first steps and a long way away from reserve and collect and full-scale integrated multichannel model, but we will watch the developments with interest!

In the UK, the multichannel news of the quarter was undoubtedly ASOS’ announcement that it was looking for partnerships with high street retailers as pick up points – see our article from screen-to-door to screen-to-store.
Argos innovated on deliveries, teaming up with start-up Shutl in a trial to offer its check and reserve customers the flexibility of 90 minutes same-day-delivery.

Pushed by their customers, 50% of whom expressed an interest in the services, House of Frasers announced its first multichannel initiatives  with the introduction of Buy and Collect for September and of an order in store service.
On the deals front, the quarter was marked by the much-commented on IPO of food retailer Ocado, who had to reduce its IPO pricing by 35% to 180p and as of end of Aug was trading 50% below the hoped for valuation. See our article onlessons learnt from Ocado.Activity was marked in the VC space with Secret Sales, Notonthehighstreet.com and mywardrobe.com some of the pure play online businesses receiving several million pounds each of growth funding from investors.

Stat of the quarter

In the US, 78% of consumers use two or more channels to shop. Specifically: 48% typically use two channels, 24% three, 6% four or more. (ATG Cross-Channel Commerce survey, 2010)